Nonbank Lenders’ On The Rise

August 29, 2014

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As some banks retreat from the home-loan market, specialized
mortgage companies are stepping in to fill the void. In the first half of the
year, lenders that aren't banks made almost a quarter of all mortgage loans,
the highest level since at least the financial crisis, according to data on the
top-30 mortgage originators from industry newsletter Inside Mortgage Finance.

Mortgage lending at big banks such as Wells Fargo &
Co. and J.P. Morgan Chase has dropped more quickly than the rest of
the industry in the wake of large mortgage-related legal settlements, new
banking standards that require lenders to carry more capital, and increased
scrutiny from regulators.

Quicken Loans Inc., the largest mortgage lender outside
traditional banks, made $24.3 billion of loans in the first half. Nonbank
lenders' rise is good news for some consumers who otherwise might not be able
to get a bank loan in the current environment. For banks, this marks a retreat
from a business that used to be very profitable but has turned into a legal and
financial headache since the crisis.

Mortgage lending has declined across the board, mostly
because of a sharp drop in refinances this year. In the first half, lenders
made $530 billion in mortgages, 53% less than the first half of 2013. Nonbank
lenders haven't been immune—Quicken's mortgage loans for that period were down
51% from a year.

The last time mortgage specialists grabbed a big share of
the market was during the housing boom that preceded the crisis. Then, lightly
regulated subprime lenders took the lead in originating exotic loans to buyers
who ultimately couldn't afford them.

Now the nonbank mortgage leaders say they are catering
mainly to safe borrowers and they view the current pullback by big banks as an
opportunity to boost market share. Some say the expansion of the mortgage
market beyond a handful of big lenders offers consumers more choice and may
reduce the damage of a large bank failure.

Some are concerned about the rise of mortgage specialists. A
July report from the inspector general for the Federal Housing Finance Agency
said Fannie Mae and Freddie Mac face an increased risk from
nonbanks defaulting on their obligations. The report also said nonbank-lending
growth may present the mortgage-finance giants "with an elevated risk of
reputational harm" since some nonbank lenders have been punished for
making mortgages that borrowers couldn't afford.

Some nonbanks, including Nationstar Mortgage Holdings Inc.,
have faced inquiries by regulators such as the New York Department of Financial
Services. Regulators say they have received consumer complaints on mortgages
that these nonbanks service. A Nationstar spokesman said the company is
cooperating with the New York regulator's inquiry, and that the company has
helped many distressed owners stay in their homes.